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NEW YORK (Reuters) - U.S. lenders are expected to issue more than $1 trillion in mortgages for home purchases in 2017, marking the first year this would happen since the housing bust a decade ago, the Mortgage Bankers Association said on Tuesday.

"Strong household formation coupled with further job growth, rising wages, and continuing home price appreciation will drive strong growth in purchase originations in the coming years," Michael Fratantoni, MBA's chief economist, said in a statement.

On the other hand, the MBA forecast a steep 40 percent drop in mortgage refinancing next year to $529 billion as the Federal Reserve raises interest rates gradually through 2018.

"We expect that refinance volume will most likely be much lower over the next few years as homeowners have repeatedly had the opportunity to lower their rates, and there will be fewer households with an incentive to refinance if rates follow the path we are projecting," Fratantoni said.

Fratantoni said the 10-Year Treasury yield will stay below 3 percent through the end of 2018, which will keep interest rates for 30-year mortgages below 5 percent over the same period .

Total home loans in 2017 will total $1.63 trillion, down from $1.89 trillion in 2016, MBA said.

In 2018, total mortgages issued will slip to $1.59 trillion, with $1.18 trillion in purchase originations and $410 billion in refinancing originations.